Market Analysis

A Government Sponsored Bank Run?

In a bizarre twist of irony, the British government exacerbated credit problems by blocking a merger between banks earlier this year. The episode underscores both the perils of government intervention and the gross misunderstanding of today's so-called "credit crunch.”

Story Headlines:


  • The British government moved earlier this year to block a merger that would have saved an imperiled bank
  • The episode underscores the implicit strength of today's capital markets and highlights once again the perils of undue government intervention


Have you heard about the bank run that could've been avoided but wasn't? (Just wait, you're going to love this.) The British government, in all its wisdom, earlier this year blocked a takeover attempt that deprived an imperiled bank some much-needed financing, thereby exacerbating credit problems. It's true!

Back in September, British mortgage lender Northern Rock's need to tap the Bank of England for emergency funds. This prompted long queues outside local branches all over the country, only to be followed by the UK government guaranteeing all deposits and a lot of anxiety amongst investors.

Britain Rocked (9/17/07) 

Then and now, Northern Rock's troubles didn't signal disaster in the credit markets, nor did they spell widespread problems for the UK economy. But credit crunch stories die hard!

Since that writing, Northern Rock's share price has dropped even further and the company is entertaining potential suitors, as well as tapping the government for more money from time to time. A pessimist (or, most media outlets) would claim Northern Rock's troubles epitomize a true credit crisis. In our eyes (up until yesterday, that is), Northern Rock had been the victim of its own aggressive ambitions—overleveraging when seas were calm but when the tide rapidly shifted in a short-period of time, the boat couldn't stay afloat.

This is a normal free market phenomenon: Those who take big risks are sometimes punished when things go bad. That capital markets self-select such transgressors out of the market is a great thing—it indicates the risk/reward relationship in global capital markets (an essential piece of its functioning) works very well.

In an interview with a British television station earlier this week, Bank of England Governor Mervyn King let slip that Lloyds had offered £30billion (no small chunk of change) for Northern Rock before the troubled mortgage lender tapped the BoE for funding. Why wasn't the deal done you ask? Chancellor of the Exchequer Alistair Darling rejected the deal after King decided it "was a matter for the Government" and not a central bank's decision to make. Oops!!!

Unfortunately for Mr. King and his loose lips, his handling of the situation will be put under the microscope again, along with his surely unappreciative friend, Alastair Darling:

Mervyn King and Alastair Darling to Face Fresh Questions over Northern Rock Crisis
Phillip Webster, Times Online

The revelation that funding was available for Northern Rock well before the so-called credit crisis underscores this was indeed a very fake credit crunch. In a true crunch, no funding would've been there in the first place, much less £30 billion! If the deal had gone through smoothly (and to be fair, there is no way of knowing whether it would have), what lasting memory would Britons have of this summer's credit turmoil? What stories to tell the grandkids? America got Long Term Capital Management (LTCM) in 1998, what would have England gotten? A whole lot of nothing!

In any case, this entire farce underscores the need to let capital markets do their work free of government "help," and further, just how shallow today's global credit fears are.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.